Institutional opening and the development of artificial intelligence: evidence from China’s pilot free trade zones

This paper examines whether China’s pilot free trade zones (FTZs) promote local artificial intelligence (AI) development. Using panel data for 284 prefecture-level cities from 2008 to 2023, we exploit the staggered rollout of FTZs within a difference-in-differences framework. The results show that FTZ establishment significantly increases the city-year stock of registered AI-related firms. The findings remain robust across alternative DID estimators, placebo and falsification tests, sensitivity analysis for unobserved selection, and alternative functional forms. The results are also positive when granted AI-related patents are used as an alternative outcome. Channel analyses provide suggestive evidence that FTZ establishment is associated with greater labour mobility, improved access to financial resources, stronger entrepreneurial activity, and a more favourable business environment. Heterogeneity analysis shows that the estimated effect is significantly larger in eastern than in central cities and provides suggestive evidence of stronger effects in areas with higher pre-existing marketization.